The world’s 40 largest mining companies continued to consolidate their stellar performance of the past several years by delivering steady growth in 2018, according to PwC’s Mine 2019 report
As a group, the Top 40 increased revenue by eight per cent, buoyed by higher commodity prices and marginally improved production. They also boosted cash flows, paid down debt and provided a record dividend to shareholders of US$43bn. Forecasts indicate continued steady performance in 2019. Revenue should remain stable, with weaker prices for coal and copper offsetting marginally higher production and higher average prices for iron ore.
Yet investors seemed unimpressed by the Top 40’s result, judging by market valuations, which fell 18 per cent over 2018. While total market capitalisation rose in the first term of this year, it remains eight per cent down compared to the end of 2017. Over the past 15 years, total shareholders’ return in mining has lagged that of the market as a whole, as well as comparable industries such as oil and gas.
Michal Kotzé, energy utilities and resources leader at PwC Africa, said, “In spite of the strong operating performance of the world’s top miners, there is still more room for improvement for mining to continue to create and realise the value in a sustainable manner. Both investors and other stakeholders have concerns about the mining industry’s ability to respond to the risk and uncertainties of a changing world.”
“Globally, stakeholders are concerned that the industry is lagging when it comes to a number of factors that have not been a traditional focus of the mining industry. These include dealing with emissions, investing in differentiating technology and digitisation, engaging more proactively with consumers and building brand.”
“The mining industry will have a window of opportunity to adapt to the growing and changing expectations of stakeholders. By utilising technology to operate safely and more efficiently, addressing global concerns, and maintaining a disciplined strategy to create ongoing value for its stakeholders, the industry can forge a better future for all beneficiaries of mining.”
Balance sheets remain strong; capital expenditure up but slow
In 2018 the Top 40 paid down US$15.5bn in net borrowings, resulting in the gearing position dropping below the 10-year average. All liquidity and solvency ratios improved during the year, leaving the world’s largest miners with strong balance sheets and cash flows.
In line with expectations, capital expenditures started to rise again, albeit from historically low levels. The 13 per cent increase over the previous year to US$57bn suggests that miners are continuing to proceed cautiously; approximately half of the capital expenditure in 2018 was for ongoing projects.
Copper and gold dominated spending in 2018, attracting US$30bn of investment. Capital expenditure on coal was consistent, year on year, and we expect miners will maintain current production levels while the coal price remains high.
Shareholders, government and other stakeholders rewarded
An 11 per cent lift in operating cash flows has allowed the Top 40 to increase shareholder distributions in 2018 to a record US$43bn. Dividend yield for the year was 5.5 per cent. There was a notable jump in share buybacks to US$15bn, up from US$4bn in 2017. Rio Tinto and BHP accounted for 70 per cent of the total activity returning proceeds of non-core disposals to shareholders.
In 2018, the share of value distributed to governments in the form of direct taxes and royalties increased from 19-21 per cent. Employees received 22 per cent of the total value distribution from the Top 40.
Gold sector consolidating
The gold sector is experiencing a renewed round of consolidation, driven by a shrinking pipeline of projects, fewer new high-grade discoveries and a lack of funding for junior developments. Gold deals increased from eight per cent of total Top 40 deal value in 2017 to 25 per cent in 2018, and this year are tracking at close to 95 per cent of deals as at the end of April.
“Gold mining companies need to be rigorous and disciplined with prospective deals. With substantially all the value generated by mergers and acquisitions between 2005 and 2012 now lost, investors are still reeling from past transactions where purchasers overpaid for assets,” Kotzé commented.
